Technology's pivotal role in Finance - The Fintech

Updated: Oct 30, 2020

Fintech is a must-know concept and an emerging sector that creates millions of new possibilities in finance. Let's dive into this revolutionary concept and start exploring its potential in shaping the future


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What is Fintech?


Every exploration starts with a definition. With that, let's look at the actual definition of Fintech (Financial Technology)


Fintech is a term used to refer innovations in the field of finance driven by technology. Also, it refers to any company which provides enhanced financial services to its customers by means of technology.

In recent days, fintech is shaping the course of the world by shifting the perspective of finance from manual to automation. The unleashing power of fintech is utilized by companies, entrepreneurs, etc. to look for solutions such as optimal workflow management, financial services, and so on.


At the time of its establishment, fintech was held as a back-end system only for banks and other financial institutions. After years, it enlarged its network, focusing more on consumer-based applications. Fintech's basic premise is - 'give access to people for various financial services through ease-of-use technology'.


Known for its potentiality, fintech is being deployed in various sectors such as education, investment management, banking services, non-profit, and fundraising organizations. The broader range of accessibility provided by fintech is changing the view of customers to track their household expenses and to facilitate their finance.


The next intriguing question is, apart from budgeting applications for customers, what are the creative innovations of fintech?


Fintech Innovations


1. Blockchain


This is one of the fastest-growing fintech applications in the world and is expected to grow fast in the future. Blockchain reached its heights after the inventions of its parent technology: Bitcoin and Cryptocurrency. Blockchain led the digital era of finance to the next level. Basically, Blockchain is a Distributed Ledger Technology (DLT) and is separated by blocks to store transactions on an extensive network. This technology helps a person to transact with another person without an intermediary or a third-party organization. Blockchain has set a trademark in its unique way of validating identities and securing transactions which are impossible to tamper. Investors are greedy in the blockchain sector and are pouring billions of dollars into its market.


2. InsurTech and RegTech


Insurance is one of the oldest sectors in the world which lacks innovation and technology. To disrupt this, InsurTech (Insurance Technology) is put in place. The vision of InsurTech is to strike out the old insurance industry models with innovative designs and technology. To rip the oldness and to stand out of the competition, InsurTech startups are using AI (Artificial Intelligence) and deep learning (a subset of machine learning) for better models and to optimize the policies for an individual. InsurTech had been a controversial idea because of its regulatory issues, but not anymore with the help of RegTech (Regulation Technology).


Insurance is a highly regulated sector in finance with many laws and acts and needs to be planned very attentively. But, in the case of InsurTech, the startups are lagging to build a refined regulatory model. To manage these concerns, RegTech was introduced. It is a technology-driven regulatory processing management system, built using SaaS (software-as-a-service) to help startups and businesses in structuring a regulatory system to meet their standards efficiently and less expensively. In recent days, data breaches and cyber-attacks are happening constantly in companies as the usage of online transactions and the internet are waxing. With the help of RegTech, companies are supervised and the conducted online transactions are totally secured. In addition, it detects anomalies and fraudulent activities in real-time using a digitalized environment.


3. Open-Banking


Open-Banking is a concept in which banks allow access to customers' transactions and other financial data through the use of Application Programming Interfaces (APIs) to a third-party organization. With the use of these data, the third-party organizations build banking or other financial applications for customers to experience a new landscape of digital money management. Through open-banking applications, people can explore a large variety of features like expense monitoring, digital wallet, and easy peer-to-peer transactions. The best real-world example of an open-banking application is Mint which provides all-in-one financial management tools.


Fintech Investments - Worldwide


As the sector of fintech is evolving faster than ever, investors' sight is gradually turning towards it.


This bar chart illustrates the trend of fintech investments worldwide right from the beginning of 2010 to the end of 2019. As can be seen, the growth starts from 2012 at 4 billion USD to 135.7 billion USD by the end of 2019 despite a fall in 2017. Investors believe that this revolutionary technology would bring about a drastic change in finance, so they started giving space in their portfolio for fintech startups and companies. In addition, in recent days, angel investors are pledging a huge amount of money for fintech startups to manage their round of fundraisings. Especially, two companies namely Opendoor and Credit Karma won investors' minds with their ideal way of giving solutions to customers. Read further to know about these companies.


Opendoor


Opendoor is a technology-driven real estate firm allowing people to buy and sell homes instantly which makes this company stand out of the crowd. Opendoor generates revenue from its customers in the form of fees which is charged during each transaction whether it's buying or selling a house. Typically, the percentage of fees charged from the total amount is between 7 and 13 percentage but never exceeds 13 percentage, as conveyed by their team. Opendoor has raised several series of funds from many venture capitalists and angel investors since its establishment.


1. In March 2014, it raised 9.95 million dollars venture capital from Khosla Ventures to begin its operations.

2. In 2018, it raised around 400 million dollars in funding from Softbank Group Vision Fund.

3. Later, in 2019, it raised 300 million dollars in funding led by General Atlantic. At the time of this funding, Opendoor's enterprise valuation was 3.8 billion dollars.


Credit Karma


From its name, we can understand that Credit Karma is a personal finance company especially credit information. It is well-known for its free services which are provided for customers. Some of its best services include tax preparation, money management, and identifying errors. Being a gratuitous company, how Credit Karma generates revenue? That's pretty simple. Credit Karma collaborates with various financial companies and recommends their products through its app to customers. If a customer buys a product from the given recommendations, Credit Karma earns money as a fee from its external collaborations. From this revenue, Credit Karma is able to manage its free services and tools. Like Opendoor, Credit Karma led various series of fundraising since its establishment.


1. In November 2009, it closed out a deal of 2.5 million dollars in Series A funding from QE Investors along with SV Angel, Felicis Ventures and Founders Fund.


2. In 2013, it raised 30 million dollars in Series B funding from Ribbit Capital and Susquehanna Growth Equity.


3. In 2014, it secured 160 million dollars in Series C funding from CapitalG, Tiger Global Management, and Susquehanna Growth Equity.


By the end of 2015, Credit Karma was valued at 3.5 billion dollars and has raised 368.5 million dollars as funds. As a surprise, in February 2020, Intuit, a software company, announced to acquire Credit Karma in a deal for 7.1 billion dollars.


Fintech Investments in India


India is considered as one of the leading fintech hubs in the world and fintech investments in India nearly doubled in 2019 from 1.9 billion dollars in 2018 to 3.7 billion dollars. According to a report by Business Line, investments in the field of Insurtech has been soaring till now despite the pandemic situation from 112 million dollars to 186 million dollars. These surges at fintech investments in India is because of the steady growth of startups who are laying a strong foundation to hold a tight grasp of fintech. To highlight, India houses the second-largest fintech startups in the world with 2,565 companies while there were only 737 in 2014. Two of the most prominent and ideal drivers of fintech investments in India are Paytm and PolicyBazaar.


Paytm


Paytm is an e-commerce payment gateway and a fintech company based in India. It is one of the widely used payment gateways among people. To exemplify, Paytm currently houses more than 140 million users (365 million users worldwide) and has achieved 3 billion sessions by customers in India alone logging in for financial services. Paytm is currently in its embryonic stage to accomplish its vision of digital excellence and that can be seen in its Annual Report of the last Financial Year (FY) 2018-2019. In that report, we can observe that their revenue from operations (3,244 crores rupees) was far less than their expense stream (6,728 crores rupees). But, from the perspective of the company, this expense is seen as an investment for future growth because their expenses were majorly allocated for payment gateway expenses (2,241 crores rupees) and promotional activities (3,366 crores rupees) in order to distribute their products geographically to customers. The revenue model of Paytm is completely based on commissions and other external affiliates. The fundraisings of Paytm is higher than that of OpenDoor and Credit Karma. It also involves some big players during the process of fundraising.


1. In March 2015, it closed out a deal with the Chinese e-commerce giant Alibaba Group for a 40% stake in Paytm. Followed by the deal with Alibaba Group, Paytm received personal backing from Ratan Tata, MD of Tata Sons.


2. After 2015, it raised 60 million dollars as funding from Mountain Capital.


3. In March 2017, Paytm received its biggest round of stake by a single investor SoftBank which brought Paytm's valuation to 1 billion dollars.


4. In August 2018, it secured a deal with the world's largest investment company, Berkshire Hathaway, for 356 million dollars which allowed the company to acquire a 3% to 4% stake in Paytm.


As of November 25, 2019, Paytm raised 1 billion dollars as funds led by various investment companies.


PolicyBazaar


PolicyBazaar is an insurance aggregator and a fintech company based in India and best known for its variety of insurance plans. Recently, it has launched term insurance for coronavirus called 'Coronavirus Term Insurance' which represents its optimism in setting insurance plans. With the emerging technologies of RegTech and InsurTech, the escalating growth and spread of PolicyBazaar is never-ending. The revenue model of PolicyBazaar is feasibly understandable. Firstly, PolicyBazaar collaborates with external insurers as affiliates. Secondly, it promotes insurance products of external insurers and creates a portal on their website. Finally, if a customer buys any of the represented products, PolicyBazaar earns commission from its affiliates or external insurers. The number of series led by PolicyBazaar for funds is considered as the largest round for fundraising from the above-discussed companies.


Starting from seed, Info Edge, the parent organization of Naukri.com invested 2.78 million dollars in the midst of 2008.


1. Later in 2011, Intel Capital (Subsidy of Intel Corporation) and Info Edge together invested 8.3 million dollars as venture capital.


2. Series A: PolicyBazaar raised 9 million dollars from Intel Capital and Inventus Capital Partners in its Series A funding.


3. Series B: In the fall of 2013, this Series B funding was led again by its old shareholders Intel Capital, Info Edge, and Inventus Capital Partners closed out a deal with PolicyBazaar for 5 million dollars.


4. Series C: In this round of funding, it secured 20 million dollars from its existing investors along with Tiger Global Management.


5. Series D: PolicyBazaar raised around 40 million dollars in Series D funding round from Premji Invest, a personal investment subsidiary of Wipro chairman Azim Premji. Along with Premji Invest, Steadview Capital and ABG Capital also included in Series D funding.


6. Series E: At end of this funding round, PolicyBazaar grabbed 77 million dollars led by at least three new investors including TrueNorth and IDG Venture Partners. Amid Series E funding round, various media reports claimed that Boston-based asset management firm Wellington Management Group invested in PolicyBazaar.


7. Series F: In June 2018, PolicyBazaar raised a total of 238 million dollars by the end of Series F funding. This funding round is majorly led by SoftBank Group which closed out a deal with PolicyBazaar for 150 million dollars acquiring a 15% stake in the company.


Starting right from the seeding, PolicyBazaar raised a total of 366 million dollars since its establishment.


Conclusion - Future of Fintech


Fintech companies are going to be in the driver seat of the Finance industry because of its effectiveness in productivity and providing space for customers to explore a wide range of financial products. The chain of Fintech is growing faster than ever as it makes simpler with its tools to optimize money management for customers. It's time to put things in perspective.


How Fintech is going to perform in the future? The technological advancements in Fintech are going to reshape many sectors' infrastructure in order to adapt its functionalities to the digital environment of automation and AI.


Firstly, the inventions of fintech technologies can disrupt many other heritage systems like banks, insurance, etc. as they can't keep up the rapid speed equivalent to the fintech networks. Secondly, data and analytics will be transformed in the future. Data is going to be the fundamental thing of a company and that doesn't change but, the distribution of data will be transformed according to the fintech networks. Above all, customer experience is going to be the key. Without a doubt, fintech is going to be the next big thing to provide customers a landscape of the new era of finance together with technology.


Can we get profited from the growth of Fintech? The investments in Fintech companies are going to be massive which we can't even imagine. It's going to be the right time to optimally invest your money in Fintech startups. As the fintech based startups are in the embryonic stage right now, you can buy their stocks at cheaper prices and you can sell them at a very high price in the forthcoming periods. Moreover, the constant increase in Fintech startups and companies are yet to create millions of job opportunities in the future.


Is Fintech a good career in the future? It's an absolute yes. Fintech is a revolutionary concept and is going to change the entire society with digitalization and automation. So, there will be many jobs for your innovative and creative ideas. Importantly, we need to update ourselves with current technology like blockchain, AI, smart contract, lightning networks with rightful resources. If you don't know where to start, there is plenty of documentation and online courses out there. So, choose your path, find your passion, build products, and never ever end your learning.


Happy Innovating!